Forever Chic - ME

Solution

V. Malleret & C. Mendoza - Forever Chic 1

Shop financial performance measure
calculation

Shop profit rate

-
Marketing expenses
Other store op. expenses
Staff expenses
Gross margin Depreciation

Sales (AED) Purchasing cost

- of goods sold

Purchasing
Selling prices X Sales volumes X
cost/unit
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V. Malleret & C. Mendoza - Forever Chic
 Shop financial
performance measure

Performance Target first

Definition Target
criteria 2 years
Shop profit Shop profit/
30 % 20 %
rate total sales

V. Malleret & C. Mendoza - Forever Chic 3

 Part I:
Year 1 Budget and results

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 Year 1 Budgeted cost of goods sold
& gross margins

Women’s
Tops Leisurewear Dresses Total
suits
Budgeted
6 000 1 800 4 200 1 700 13 700
sales volume
Budgeted selling
534 979 534 730
price/unit
Total annual
3 204 000 1 762 200 2 242 800 1 241 000 8 450 000
sales
Unit purchasing
245 480 200 300
cost
Purchasing cost
1 470 000 864 000 840 000 510 000 3 684 000
of goods sold
Gross margin 1 734 000 898 200 1 402 800 731 000 4 766 000

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 Contribution of product lines
to gross margin
Women’s
Tops Leisurewear Dresses Total
suits
Volume sold 6 000 1 800 4 200 1 700 13 700
in % of total 43.8 % 13.1 % 30.7 % 12.4 %
vol.
Annual sales 3 204 000 1 762 200 2 242 800 1 241 000 8 450 000
in % of total
sales 37.9 % 20.9 % 26.5 % 14.7 %
Total purchasing
1 470 000 864 000 840 000 510 000 3 684 000
cost
Gross margin 1 734 000 898 200 1 402 800 731 000 4 766 000
in % of total GM 36.4 % 18.9 % 29.4 % 15.3 %
GM in % of
54.1 % 51 % 62.6 % 58.9 % 56.4 %
sales

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V. Malleret & C. Mendoza - Forever Chic
 Year 1 Budgeted shop profit
Gross Margin 4 766 000
Credit card commission (3% of Sales) 253 500
Advertising (3% of Sales) 253 500
Sales & Marketing Total 507 000
License fees 4 192
Insurance 3 353
Store rent 1 000 000
Pre-opening expenses 75 709
Sundry expenses 136 233
Store Operating Exp. Total 1 219 487
Salaries Basic (including benefits & 485 000
commissions)
Sales commissions (1% of Sales) 84 500
Staff Total 569 500
Decorations depreciation 237 600
IT Material depreciation 8 000
Depreciations Total 245 600
Total expenses 2 541 587
Shop profit 2 224 413
Shop profit rate 26.3%
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V. Malleret & C. Mendoza - Forever Chic
 The budgeted profit of Forever Chic
store meets target profit rates

Target
Year 1 Budget
(First 2 years)
Shop profit 2 224 413
Shop profit rate 26.3 % 20 %

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 Year 1 Actual gross margins
per product line and in total

Women’s Leisure
Tops Dresses Total
suits wear
Total Volume
6 600 1 170 4 400 1 114 13 284
sold

Total annual
3 300 000 1 078 740 2 226 400 776 458 7 381 598
sales

Unit purchasing
245 480 200 400
cost
Cost of goods
1 617 000 561 600 880 000 445 600 3 504 200
sold

Gross margin 1 683 000 517 140 1 346 400 330 858 3 877 398

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Year 1 Actual shop profit and shop profit rate
Gross Margin 3 877 398
Credit card commission 221 448
Advertising 221 448
Sales & Marketing Total 442 896
License fees 4 192
Insurance 3 353
Store rent 1 000 000
Pre-opening expenses 75 709
Sundry expenses 136 233
Store Operating Exp. Total 1 219 487
Salaries Basic (including benefits) 485 000
Sales commissions 73 816
Staff Total 558 816
Decorations depreciation 237 600
IT Material depreciation 8 000
Depreciations Total 245 600
Total expenses 2 466 799
Shop profit 1 410 599
Shop profit rate 19.1 %
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 Comparison Year 1 Actual/Budget

Variance
Budget Actual Variance
in %

Total sales 8 450 000 7 381 598 (1 068 402) (12.6%)

Gross
4 766 000 3 877 398 (888 602) (18.6%)
margin
Total
2 541 587 2 466 799 (74 788) (2.9%)
expenses

Shop profit 2 224 413 1 410 599 (813 814) (36.6%)

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 Analysis

 Main issue: Actual total sales are lower than

budgeted total sales by 12.6%

 Actual shop profit is much lower than budgeted

shop profit (36.6%)
 Variable expenses are lower than budget since they are
calculated as a percentage of sales
 Budgeted purchasing costs are higher than budget for
the dress product line
 Actual fixed expenses are as budget

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 Sales variance analysis (1)

Budget
Volume
Budget adjusted to Actual Price variance
variance
Vs x Ps actual volume Va x Pa (Actual – FB)
(FB – B)
(FB = Va x Ps)
Sales 6 000 x 534 6 600 x 534 6 600 x 500
320 400 (fav.) 224 400 (unf.)
Tops = 3 204 000 = 3 524 400 = 3 300 000
1 800 x 979 1 170 x 979 1 170 x 922
Sales WS 616 770 (unf.) 66 690 (unf.)
= 1 762 200 = 1 145 430 = 1 078 740
4 200 x 534 4 400 x 534 4 400 x 506
Sales LW 106 800 (fav.) 123 200 (unf.)
= 2 242 800 = 2 349 600 = 2 226 400
Sales 1 700 x 730 1 114 x 730 1 114 x 697
427 780 (unf.) 36 762 (unf.)
Dresses = 1 241 000 = 813 220 = 776 458
Total
8 450 000 7 832 650 617 350 (unf.) 7 381 598 451 052 (unf.)
sales

V. Malleret & C. Mendoza - Forever Chic 13

 Sales variance analysis (2)
 The total volume variance is unfavorable (617 350)
 Total number of units sold (13 284) is lower than budget (13 700)
 The store sold more units than budget for tops and leisurewear and
fewer units than budget for women’s suits and dresses
 As women’s suits and dresses have higher sales prices per unit, the
net effect is negative

 The total price variance is unfavorable as well

(451 052)
 For all product lines, a larger proportion than budget was sold at
discounted prices
 2 product lines have both a price and a volume variance which are
unfavorable

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V. Malleret & C. Mendoza - Forever Chic
 Part II:
Action plans for Year 2

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 Action plans for Year 2

 Increase sales thanks to:

 Additional sales staff speaking Chinese, Japanese and
Russian
 Set up of a training course for the sales team
 Increase advertising effort
 Discount prices later in the season
 Reduce costs
 Renegotiate credit card commission rates
 Make rent a variable cost

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 Year 2 Purchasing cost of goods sold
and budgeted gross margins

Women’s Leisure
Tops Dresses Total
suits wear
Total volume sold 6 600 2 000 4 400 2 000 15 000

6 600 x 534 2000 x 979 4 400 x 534 2000 x 730

Total annual sales
= 3 524 400 = 1 958 000 =2 349 600 = 1 460 000 9 292 000
Unit purchasing
245 480 200 400
cost
Cost of goods sold 1 617 000 960 000 880 000 800 000 4 257 000

Gross margin 1 907 400 998 000 1 469 600 660 000 5 035 000

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Year 2 Budgeted shop profit & shop profit rate
Gross Margin 5 035 000
Credit card commission 157 964
Advertising 325 220
Sales & Marketing Total 483 184
License fees 5 000
Insurance 4 200
Store rent 557 520
Pre-opening expenses 0
Sundry expenses 175 000
Store Operating Exp. Total 741 720
Salaries Basic 655 000
Sales commissions 92 920
Training course costs 80 000
Staff Total 827 920
Decorations depreciation 237 600
IT material depreciation 8 000
Depreciations Total 245 600
Total expenses 2 298 424
Shop profit 2 736 576
Shop profit rate 29 %
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 Action plans for Year 2

 These action plans should enable the store to

meet target profit rates
 Sales are expected to increase by 25,9 %: is it
realistic?
 Renegotiation of the payment structure of the
rent may be difficult
 Some action levers are not controllable by the
store manager (for instance, the collection
attractiveness)

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